Case II – Hamburg Case

Any of irrelevant information to the question below, you can ignore from the description. This case will be updated and continued to the Second Case Study at the final.

Jonathan and Amie Hamburg had been married for 22 years and are now separated. Jonathan, who is 56 years of age, manages a mowing company and is the owner of two offices in two towns. Amie is 50 years of age and owns and operates a photo studio. The couple has two children: Reginald, age 15, and Cloe, age 11. All of the Hamburg are in good health. Jonathan and Amie have simple wills leaving their entire estates to each other.

Amie started her photo studio about 9 years ago. The business is called Hamburg Studio, and Amie is the sole photographer. In order to expand her business, Amie took out a loan about five years ago from First Bank in the amount of $60,000, and Jonathan cosigned the loan. Amie has paid back $7,500 of the original loan amount, leaving a balance of $52,500. Amie makes monthly payments on the loan. The business has done well, and Amie nets about $55,000 annually after paying her expenses.

Amie has three employees. She has adopted a profit-sharing Keogh plan for herself and her employees. Although the plan offers several different investment options, Amie has her account balance invested through the plan in guaranteed investment contracts (GICs). In addition, she has invested IRA money in a balance mutual fund. She describes herself as a conservative investor. Amie has named Jonathan as the beneficiary of her profit-sharing plan and of her IRA.

Jonathan has moved out of the home that he owns with Amie as tenants by the entirety. He is currently renting an apartment for $940 per month. Since Amie and Jonathan have agreed that she will keep the house in her name, Amie makes the monthly mortgage payment. Jonathan and Amie bought the house for $92,000 and have spent $52,000 on capital improvements. The current fair market value of the house is $300,000.

The children will remain with Amie and spend vacations with their father. Amie is currently receiving child support and alimony from Jonathan. Jonathan earns approximately $120,000 annually from his business. He is also the owner of two buildings that are rented to the Hamburg Mowing Stars, Inc. One building was purchased 20 years ago for $150,000, and the other was built 15 years ago for a cost of $380,000. Each building is now worth approximately $480,000. Jonathan is the sole stockholder and president of the Hamburg Mowing Stars, Inc., which is an S corporation.

Hamburg Mowing Stars, Inc. has a 401(k) plan that employee contributions at a rate of 50 cents for each dollar contributed by an employee, up to 6% of each employee’s compensation. The company has eight employees in addition to Jonathan. The 401(k) plan offers different investment options, and Jonathan has invested his 401(k) plan contributions in a balanced mutual fund. Jonathan describes himself as a conservative investor. Jonathan has named Amie the beneficiary of his 401(k) plan account balance and of his IRA account assets.

Jonathan owns a whole life insurance policy with a face amount of $200,000 and term life insurance in the amount of $300,000. Amie owns a universal life insurance policy with a face amount of $200,000. Jonathan and Amie have named each other as beneficiaries of these policies. Jonathan has a disability income insurance policy that will pay him $1,000 monthly if he is disabled. Jonathan pays $200/month for his life insurance premium and Amie pays $150/month for her life insurance. Jonathan’s life insurance has the cash value of $35,000 and Amie’s life insurance has the cash value of $30,000.

Since Jonathan would like to have a lavish funeral. The costs of his funeral will be in the range of $35,000. Assuming he dies today, the administrative expenses for his estate are expected to be $35,000.

Jonathan pays $150/month for automobile insurance and Amie pays $150 as well. Jonathan’s car has market values of $30,000 and Amie’s care has market value of $25,000.

Question 1. All the following methods can be used by the Hamburgs family to reduce the amount of risk to which the family is currently exposed, EXCEPT:

A. They could sell their home and both spouses rent property.

B. They could remove the deductibles they currently have on all their automobile insurance policies.

C. Amie could incorporate her photo studio business.

D. Jonathan could change the S corporation to a conventional C corporation.

E. Jonathan could implement additional loss prevention methods for his two buildings rented to Hamburg Mowing Stars, Inc.

Question 2. In which of the following ways does Amie’s universal life (UL) policy differ from Jonathan’s whole life (WL) policy?

A. The UL policy provides for tax-deferral of investment income.

B. The UL policy permits Amie to use the policy’s cash value to pay one or more future premiums.

C. The UL policy’ cash value may be increased by increasing the amount of each future premium payment.

D. The UL policy’s cash value is more predictable than the cash value of the WL policy because of the guaranteed investment results.

E. The UL policy’s investment results can be expected to exceed the investment results of the WL policy.